Govenrment and Business Environment Case Study

Debt Relief: The African Paradox

OR

Abstract:
Sub-Saharan Africa (SSA) is by far the most indebted and aid-dependent region in the world, with total external debt stock of around 52.5% of its gross domestic product (GDP) in 2004. African countries together received around $540 billion of debt between 1970 and 2002, revealed a United Nations Conference on Trade and Development (UNCTAD) report. Though they repaid close to $550 billion in principal and interest, the debt stock outstanding at the end of 2002 was $295 billion (at 2005-end, it was over $300 billion). Economists traced these cascading debts to a number of causes. Some attribute the crisis to loans that had been given by creditors without much consideration on how countries could pay them back, while others blame it on rich countries that extended loans under conditions that served their own interests. Moreover, loans were often given to inefficient governments or military regimes that were no longer in existence. Rising interest rates and flawed economic policies had served to multiply these debts manifold. The situation in the region posed a dilemma for the world. On one hand, it was clear that these countries were not in a position to repay their debts without starving entire generations. The incidence of AIDS had increased the medical expenditure in the region to alarming proportions and thousands of children died of malnutrition and related diseases each year. Many of the countries in the region were spending more on servicing debt annually than on health care and education combined. In such a situation, cancellation of 100% of debt for these countries seemed the only feasible option. On the other hand, many of the African least developed countries had squandered and misused the loans extended to them in non-productive expenditure, instead of investing them in growth generating and developmental initiatives. They had opted for further loans to pay off the old ones, creating a spiral. This raised questions about accountability of both debtors and creditors. Many economists felt that the inherent social structure of these countries promoted economic inequality and the benefits of loan cancellation would not trickle down to the lowest strata of society. This case investigates the causes and dimensions of this debt crisis and explores whether, in the absence of radical changes in the political and social structure in the region, debt cancellation would be a tangible long-term solution to the problem.

Pedagogical Objectives:

• To understand the economic history of Africa
• To analyse the causes and dimensions of African debt crisis
• To analyse whether hundred percent debt relief will benefit Africa
• To discuss the importance of political and social structure in utilising debt relief effectively.

Keywords : Government and Business Environment Case Study,Debt cancellation, Africa, Heavily indebted poor country (HIPC), Least developed countries (LDC), Sub-Sahara, Economics, Poverty, Development, Growth, Debt trap, Human Development Index, AIDS, Education, Arms conflict in Africa, G8 summit